Tax Consequences of a Short Sale

Short sales and foreclosures are a major part of most real estate markets across the country and many sellers are hearing incorrect information regarding their tax consequences after their home has sold.

In 2007, the federal government passed a law directing the IRS not to count mortgage debt forgiven by a lender as income…but it applies only to purchase money.  The forgiven debt does NOT include debt on a cash-out refinance or 2nd homes.  There is also a dollar limitation of $1 Million for married couples filing separately and $2 Million for joint filers. 

There is also the case of secondary debt and whether that is forgiven or not.  Once the primary lien holder approves a short sale, it is common for the secondary lien holder to accept a small partial payment.  But, many times the secondary lien holder will sell the balance to a collection agency for a small sum…so a homeowner may think that they will be able to apply for a loan in 2-3 years after a short sale but find out that they have a collection agency contacting them seeking payment of that debt.

Short sales are complicated and they have legal and tax consequences for sellers.  It is extremely important that all homeowners considering a short sale have a discussion with an attorney and accountant so that they know exactly what they will be responsible for financially. 

If you are in the Northern Colorado area and would like to discuss options then I’d be happy to share my experience as a Certified Distressed Property Expert and guide you through the process. 

Thanks for the read!  My readers have taken my blog to over 40,500 views!!

Please provide comments on this article and any suggestions for a future article…your input is always appreciated…thank you!